Saturday, June 16, 2012

Once you finally have funding from the bank, you'll be able to start spending it (and in my case, almost throw up at the site of your beautiful, new home).

In working with your builder, you'll need to come up with a Line Item Breakdown, which is the document that the bank uses to issue each draw (ie: put the money in your pocket). Your Line Item Breakdown will show a budget for everything from clearing and excavation to hardwood flooring. This is the document that the bank will stick to EACH AND EVERY TIME.

So let me put it to you this way: Let's say that your subcontractor needs $25k to dig a hole and pour some concrete. I had stupidly assumed that I could call up my friendly bank rep, have her issue a draw for $25k that was listed on our Line Item Breakdown for "excavation and concrete" and she would sink the money into my account. Makes sense, right?

What no one had ever told me was that a draw is issued after the work is completed. The subcontractor does the work, you request money from the bank and the bank issues the money (this is called a "draw") after the work is completed and the bank can physically go out to the job site and verify that the work has been completed.

With that being said, bear in mind that you might have to float your builder a huge wad of cash for the subcontractors to get started. While that might drain your savings account, once you get the draw from the bank, you can replenish your savings with that money (Yes, that's entirely kosher, because I called the bank rep to make sure that we could pay ourselves back after shunting all of our savings to the builder to get started. Again, that also made me want to hurl).

Another consideration when laying out your budget is this: Let's say that you only budget $25k for the excavation and concrete and then the bill comes in at a whopping $45k. Since your Line Item Breakdown only requested $25k, that is all you will get from the bank. That means that you'll be required to come up with the remaining $20k from God only knows where.

It's my suggestion, and the suggestion of our builder that you pad up the front of your loan. Overbudget for initial expenses like excavation, concrete, foundation work, and framing - because any excess that you have from your draws stays in your account, and can be spent on other line items down the road. You don't want to get hosed and be in the hole right at the very beginning of your project, so be generous and give yourself a big allowance for the first few things in your project.

Now that I've laid out the steps to get started, I'd like to get into the fun part!

Thinking about our construction loan gives me a headache and makes me want to take a nap, but it's a must-discuss topic because: no money = no house.

Finding someone to loan you money to build a house is slightly more difficult than securing a conventional mortgage, but you'll generally take the same steps:

Start making phone calls. We were referred to several lenders by our builder. I put in a call to three different lenders and started to ask the basic questions: What sort of packages can you offer me? What are your current rates? Do you offer an all in one package (where the construction loan rolls into a conventional 30 year fixed mortgage at the end of the construction period)?

Start gathering documents. You'll need at least 2 months of: bank statements, credit card statements, paystubs and 2 years of your W-2. Basically you're going to be showing all of your assets and liabilities to your lender, which sort of feels like those dreams where you show up to high school naked.

Make an appointment to turn in your loan application. You'll also want to have a chunk of change available to turn in with your application (think: several hundred dollars).

Wait for the bank to approve your loan: This step is by far the longest in the construction loan process. Basically the bank takes their sweet time checking all of the documents from step #2 to make sure that you're going to be a reliable customer. Since construction loans are more of a risk to the bank, they want to make absolutely sure that you're financially stable enough to pay them back both during the construction period and after.

The loan package that we selected was an all in one sort of deal. That means that we pay interest only on the amount borrowed during the time of construction, and once the home is complete, our construction loan will automatically roll into a 30 yr fixed mortgage at the rate that was locked when we began construction (we scored a great rate of 4.875% on our 30 yr fixed). In the event that rates dip a bit more once the house is completed, we can refinance into that rate with minimal penalty.